Thread by @sritara

Thread on #LICIPO

Based on forthcoming series on #LIC in @newsclickin
Part 1 - on valuation

1 India’s biggest-ever IPO will rest on what is determined to be #LIC’s Embedded value (EV). It promises to be the mother of all privatisation scams.

2 The notion that the EV of an insurance company captures its true worth is being cited as gospel. Nothing could be farther from the truth, for 2 reasons: a) as a measure the EV suffers from serious problems, because of the kind of assumptions/ methodologies it adopts

3 b) the EV ignores the specific characteristics of #LIC as a financial institution, sui generis in the world of finance. Nothing like it exists anywhere in the world. In my forthcoming article I examine how on both counts the valuation exercise would undervalue its real worth.

4 It is important to recognise that the EV is NOT necessarily an objective measure of the worth of an insurance business. It is based on a rigid set of assumptions and the methodologies adopted. The EV calculated by Milliman may not reflect the “real” value of LIC

5 The LIC has NEVER had to undertake valuation of its “real” worth, simply because a conservative assessment of its assets, at book value, gave it protection against uncertainties. Importantly, life insurance are in the nature of long term contracts 20-30 yrs or more

6 For example, LIC is the biggest realtor in India, owning prime properties across India. The mind boggles at the thought that Milliman and its associates would have been able actually estimate the market value of each of these real estate assets during the pandemic.

7 The EV’s recent evolution as a valuation tool aims to narrowly measure shareholders’ benefit from the sale of an insurer. It does NOT include goodwill, brand value and future profits that may accrue from new business. These will deflate the value of #LIC the market leader

8 EV is also affected by the timing of the evaluation, which could potentially affect LIC valuation. LIC’s Value of New Business (for individual policies) had fallen sharply in 2020-21 because of the pandemic.

9 Incorporating this into the valuation would further lower EV. The valuation exercise, undertaken during uncertainties of the pandemic, dampens EV further.

10 In fact, you and I could estimate an EV of the same insurer and come to different results. Valuation thus lies in the eyes of the beholder! And, you and I could have different EVs depending on when you or I choose to compute them!

11 The EV methodology has no place for unique features of the LIC. The fact that LIC was built on the basis of policy holder’s contributions won’t figure in Miliman’s report. Let this be clear: between 1956 and 2011, the government’s contribution was just Rs. 5 crore.

12 The entire growth of LIC was thus propelled by policy holders contributions. LIC was truly unique in that policy holders ranked above the sole shareholder (the govt). 95% of the surplus generated every year was given back to policy holders as bonuses. The govt got only 5%.

13 Nothing like LIC exists anywhere in the world. The question to ask is this: how can the asset base of a company, evaluated by a methodology that systematically excludes those who have built the LIC, be fair?

14 Another questions is this: how can the interests of policy holders who have provided the entire solvency reserve of the LIC, which has backed the vast expansion of its asset base, be deprived of the valuation now?

15 The argument that policy holders would be entitled to a portion of the shares sold through the IPO is positively evil for the simple reason that the universe of policy holders is far bigger than the universe of potential policy holders who may become shareholders after the IPO

16 Remember, LIC has about 400 million policy holders. We are talking about a group of people who constitute about one-fifth of the Indian population.

17 The NaMo Govt will undoubtedly try to use the #LICIPO as a mood elevator in the stock markets. Meanwhile, millions would lose, even as a tiny number turn even more wealthy.

18 (last) Valuation of public enterprises lined up for sale has ALWAYS been controversial. Make no mistake: the LIC stake sale will prove to be most scandalous of them all. Forget Balco, forget Air India, this it.

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